New Mass. law has eased foreclosures

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If the Massachusetts housing market is on fire right now, it’s only because the state has been out in the cold for so long that we’ve forgotten what real flames look like. Homes are moving at a nice clip in wealthy suburbs that never really felt the recession’s sting, but plenty of Massachusetts homeowners are still hurting, nearly eight years after the state’s housing market collapsed. It’s a measure of how long that hurt has lingered that optimism now springs from the fact that a somewhat smaller slice of the state remains under duress.

Against this less than overwhelming backdrop, though, foreclosures in Massachusetts are all but disappearing. Massachusetts saw a 70 percent drop in bank home seizures in the first three months of the year, leading the real estate tracking firm the Warren Group to declare the state’s foreclosure crisis over. The drop in foreclosures is eye-popping, but so is the context: The foreclosure pipeline is drying up, even though the housing market that feeds the pipeline remains only marginally improved. Six years and 58,000 seized homes later, banks are finally confronting the wasteful senselessness that has defined the Massachusetts foreclosure crisis.

Make no mistake: The cities and neighborhoods that bore the brunt of the housing market’s downturn are still fighting to emerge from the wreckage. Housing prices in Brockton remain 40 percent lower than the city’s 2005 highs; it’s not the 47 percent price dip the city sunk to, but it’s not far off. The climb back looks equally steep in places like Worcester and Dorchester. Homes in Dorchester, Boston’s former foreclosure capital, are now selling at their slowest pace in two decades. According to the real estate site Zillow, at the end of last year, 139,000 Bay State homeowners owed more on their mortgages than their homes were worth; on average, they were over-mortgaged by one-third. After eight years of terrible housing headlines, less bad news now masquerades as good news. So here’s the good news — across the state, home prices haven’t risen dramatically yet, but at least they’ve stopped falling.

This shouldn’t be a recipe for rapidly diminishing foreclosures. Foreclosures have closely followed economic distress and depressed home prices, and Massachusetts has its share of both. But foreclosures have ebbed here because the state changed the rules surrounding when foreclosures crop up.

Massachusetts was instrumental in forcing a $25 billion nationwide settlement with five of the country’s largest mortgage banks. The settlement put to rest charges that Bank of America, JP Morgan, Citigroup, Wells Fargo, and Ally had illegally seized homes and wrongfully denied homeowners the chance to alter their mortgages and avoid foreclosure. A state lawsuit filed in Boston helped push the five banks into agreeing to the nationwide settlement. The settlement, in turn, has brought $295 million in mortgage principal write-downs to Massachusetts homeowners.

More importantly, a new state law requires banks to prove that when they want to foreclose on a property, they actually need to foreclose. It’s often cheaper for the banks to modify a troubled mortgage than it is to evict a homeowner, take a property back at auction, and then try to find a new buyer for it. But for years, the country’s biggest banks met the housing meltdown with a foreclose-first approach, because foreclosing on bad loans was all they’d ever done. The new state law, enacted last year, upends the way banks approach foreclosures. The new foreclosure law doesn’t ask any lender to take a loss on bad loans. But it does require banks to weigh the costs of foreclosing on properties and evicting families against the costs of modifying shaky loans, and to work to keep families in their homes when it’s in the banks’ own economic interests to do so.

Foreclosure rates in Massachusetts dropped dramatically after the national foreclosure settlement and the state foreclosure avoidance law were signed. Home seizures are disappearing far more quickly here than they are in the rest of the country. They’re disappearing, even though banks and homeowners don’t have a dramatically improved housing market to lean on. This sudden drop in foreclosures proves that foreclosure avoidance efforts work, if banks are serious about making them work. That’s likely little consolation to the 58,000 Massachusetts residents who lost their homes over the past six years, before the banks got serious about making foreclosures stop.

Paul McMorrow is an associate editor at Commonwealth Magazine. His column appears regularly in the Globe.